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As many investors were trying to determine whether the bull market that propelled stocks upward since March 2009 would continue stampeding through 2010, Robert Phillips and Leslie Thompson of Spectrum Management Group began bailing out of their international positions in equities.

"In January, we sold our international exposure both in developed countries and in emerging markets," says Thompson, who together with Phillips manages the $325 million investment firm.

"With all of the ramblings about what's going on in China in terms of increasing interest rates, or in Portugal, Ireland, Greece and Spain with their debt issues -- we took that as an indication from a technical perspective that money was flowing out of that space," he says. "We wanted to take some risk off the table."

It turns out Phillips and Thompson were early to make the same decision a number of money managers have made this year: moving their money out of European equities and into U.S. stocks.

A Bank of America Merrill Lynch Fund Manager Survey confirms as much. In March, 21% of fund managers polled said they were underweight in European equities versus only 2% in January. Additionally, the survey found 19% of those surveyed are now overweight in U.S. equities, up from just 1% in January.

"Investors' concerns about Greece are easing, but European country risk remains a key constraint to optimism over economic recovery," says Gary Baker, head of European Equities strategy at BofA Merrill Lynch Research.

Growth Outlook Sours

The continuing concerns about sovereign debt have soured the overall outlook for European companies as well. The survey showed that 40% of those responding felt the outlook for eurozone corporate profits is the least favorable of all regions. In fact, just 45% of European fund managers predicted growth in their own economies over the next 12 months in March, down from 72% in January.

Interestingly, U.S. fund managers weren't very optimistic about expansion either: 43% forecast growth in the American economy over the next 12 months, down from 76% in January. Although fund managers aren't optimistic about the state of the economy, a movement of money from European to American equities could fuel a continuing rally in U.S. stocks.

While many fund managers have scaled back on their European investments, Phillips and Thompson went the extra step of bailing out of their entire international positions, temporarily, as a precautionary measure because of uncertainty about how the sovereign debt crisis may affect the euro if any European country defaults.

The duo made the move as an asset-protection measure for their clients who don't want to risk losses that could mirror those suffered during the U.S. financial meltdown that began with the collapse of Lehman Brothers in 2008. Phillips says the prices of European equities could be cut in half "in the blink of an eye" if the euro stumbles.
When to Reestablish International Positions

"Once it's apparent that the Greece, Portugal, Ireland, Spain debt problems are going to find a solution that's not going to cause the euro to fall apart, at that point you want to move back to your full international allocation," says Phillips, who expects it will take two or three months before the debt problems get resolved. "Enough things are in the works that the headline risk will go away at some point in time, and that would be the time to reestablish your international positions," he adds.

Until then, the two money managers have taken positions in gold and moved more money into U.S. large-cap stocks as a hedge against the debt worries in international markets.

"The best hedge is U.S. stocks," says Phillips. "They've lagged the whole rally, but they've got the strongest balance sheets in the world, and we think they will do the best in this next cycle."

He and Thompson believe that as that cycle progresses, U.S. large-caps that make productivity-saving software and services, as well as other supplies, devices and hardware that businesses will need to remain competitive, are likely to see positive top-line growth in 2010. They're betting that such companies will lead the U.S. markets on their next move higher.